What Is an Incontestability Clause and How Does It Protect You as a Consumer?
An incontestability clause in an insurance policy prevents the insurance company from contesting the policy based on errors in the application, outside of a defined contestability period. This clause keeps the insurance company from denying a claim based on some error in the application, once the policy has been in force for two years. As a consumer, you are protected from having your policy canceled or claim denied simply because you mistakenly failed to provide a complete medical history or made some other error in your application for insurance. Per California law, an incontestability clause is included in every individual life insurance policy issued in the state.
What Does California Law Say About Incontestability Clauses?
Section 10113.5 of the California Insurance Code requires every life insurance policy issued or delivered in the state to contain a provision stating that the policy is incontestable after it has been in force, during the lifetime of the insured, for two years from the date of issue.
Life insurance applications require the applicant to fill out a lengthy and comprehensive medical history before the insurer will agree to issue a policy. Underwriters base their premiums on this information and prize it highly – the more likely you are to get sick due to genetics (family history) or die young from a risky occupation or hobby – the more they will charge you in premiums, if they even accept you at all.
Naturally, applicants want to be accepted and get the lowest premium, so it is not surprising that people try to present themselves in their best (healthiest) light when applying for insurance. If they fail to include certain information or misrepresent their situation, the insurer could have a distorted view of the applicant and charge the wrong premium or accept a policy they otherwise would not have.
When policyholders make a claim, the insurer might want to go back to the application and see if the death should have been foreseen based on the information provided in the application. Because of California’s incontestability law, however, if the insurance company wishes to contest the validity of the policy it issued, it must do so within two years from the date it issued the policy.
Exceptions to the Incontestability Clause
Nonpayment – Insurance policies can be contested at any time based on nonpayment of premiums.
Imposter – A life insurance policy is void regardless of how long it has been in force if photographic identification was presented and an imposter was used during the application process.
Incontestability Clauses for Supplemental Benefits
Certain riders providing supplemental benefits must have their own incontestability clauses, with a two-year contestability period limited to statements in the application for the supplemental benefit that are material to the risk assumed by the insurer. Supplemental benefit riders that must have incontestability clauses include:
- Additional benefits in case of death or dismemberment or loss of sight by accident
- Safeguard against lapse – Insurer agrees to waive premium if insured becomes totally disabled for the period of disability or some other specified period
- Special surrender benefits
- Accelerated death benefits – Provides an advance payment of part of the death proceeds if the insured has a chronic illness or a medical condition that, without treatment, would lead to death within a defined period of six months or more
Incontestability Clauses Help Prevent Bad Faith Insurance Practices
It would be wrong for an insurance company to blindly accept premium payments for years, never asking questions until a claim is filed, and only then go back to look for any reason to deny a claim. The appropriate time for an insurer to review a policyholder’s application is during underwriting. Contesting the policy more than two years after the policy has been issued is against the law in California and might be evidence of insurance bad faith. You could be entitled to the benefits of your policy and perhaps additional money damages for harm caused by a delay or denial of benefits. Issues surrounding contestability periods can be complex. Speak with a qualified California insurance lawyer if you believe your benefits were unfairly denied.